Credit Risk Rises for Fifth Week in Europe on Fed QE Withdrawal

The cost of insuring European
company bonds against losses headed for a fifth weekly increase
as the Federal Reserve confirmed it will slow asset purchases if
the economy continues to strengthen.

The Markit iTraxx Europe Index of credit-default swaps on
125 companies with investment-grade ratings climbed 13 basis
points to 123, the longest rising streak since the week ending
Aug. 26, 2011, according to data compiled by Bloomberg. The
average yield investors demand to hold European corporate bonds
rose 15 basis points to a four-month high of 2.19 percent, Bank
of America Merrill Lynch index data show.

Credit risk started increasing when Fed Chairman Ben S.
Bernanke said on May 22 the central bank could taper stimulus if
the U.S. employment outlook showed sustained improvement. It
jumped again this week after he mapped out a timetable for
withdrawal, saying the Fed will begin winding down $85 billion
of monthly bond purchases this year and end them by the middle
of 2014 if the economy continues to improve as forecast.

“The market has been addicted to liquidity injections
through quantitative easing,” said Geraud Charpin, a fund
manager at Bluebay Asset Management Ltd. in London which
oversees $55 billion. “Just the mere thought of reducing the
dose makes people feel a bit sick. We are seeing withdrawal
symptoms.”

Bond Sales

Daimler AG (DAI), the world’s third-biggest maker of luxury cars,
led 8.4 billion euros ($11 billion) of bond sales, the fifth
week issuance has fallen below the weekly average of 15.2
billion euros, according to data compiled by Bloomberg.

In the new issue market today, Danone SA (BN), owner of the
Activia yogurt and Evian water brands, raised 500 million euros
from 2.6 percent notes maturing in June 2023, according to a
person familiar with the deal.

Oracle Corp. (ORCL), the largest maker of database software, has
mandated banks to arrange meetings with investors in Europe
starting June 25 for a potential sale of euro-denominated bonds,
according to another person. It would be the Redwood City,
California-based company’s first sale in the currency, Bloomberg
data show.

The Markit iTraxx Crossover Index of default swaps on 50
high-yield companies also rose for a fifth week, climbing 45
basis points to 496, the biggest weekly increase since March 22.
An increase signals deterioration in perceptions of credit
quality.

A basis point on a credit-default swap protecting 10
million euros of debt from default for five years is equivalent
to 1,000 euros a year. Swaps pay the buyer face value in
exchange for the underlying securities or the cash equivalent
should a borrower fail to adhere to its debt agreements.